Validate Cost ERP
Cost of ERP
ERP systems have now been around long enough that most companies are convinced and aware of the benefits they can bring. There is no denying that deploying an ERP solution is a major event in the life of a company, and the costs involved are substantial. ERP systems can be a fairly large investment; therefore, one wants to see a well-reasoned return on investment before moving forward. Not everyone understands the benefits that an ERP solution can bring.
I would like to share with you some basic facts that I think will help warrant the cost of an ERP system. Some of the benefits of the investment can be measured where others cannot.
Let’s start with the benefits that are tangible and measurable:
- Reduction in Inventory – Because of improved planning and scheduling one can expect a 20% inventory reduction. This is a commonly achieved benchmark, plus a recurring element to it in terms of lower warehousing costs, handling and transportation and reduced damage. These can add another 5% to 10% to the savings.
- Reduction in Material Costs – An ERP leads to improved procurement processes. Better demand forecast allows better terms from vendors which can mean a 5% reduction in purchasing costs. You will no longer have to pay for material at those premium prices because of shortages.
- Lower Cost of Labor – Manufacturing practices will improve and your work schedule will suffer from fewer outages and interruptions. You can estimate that an ERP can bring down your direct and indirect labor costs by as much as 10%. This will reduce overtime and re-work as well as speed up the work flow on the shop floor.
- Improved Sales and Customer Service – Better coordination and communication within the company and streamlined production leads to an increase in sales. A company running a good ERP sees fewer lost sales, an increase in overall sales and far greater customer satisfaction. Ability to manage and keep customers happy will result in repeat business. This increase can be as much as 10% of the previous sales value.
- Improved Accounting and Cash Flow – Companies that run a robust ERP systems report a reduction of the number of days for their receivables. By simply reducing the days the receivables are outstanding, an ERP can improve your cash flow significantly. All result in a reduced requirement of cash. Reports readily available for outstanding invoices, delinquent accounts will help reduce those “problem” accounts. This can typically reduce the days outstanding receivables by 18%.
Besides the easily measured tangible benefits, there are other improvements that are hard to quantify but are equally important to the company. Here are three:
- Improvement in Process Design and Production – Since the ERP uses a common database that runs through the shop floor as well as the design section, this allows for better control over process design and production. If last minute changes are needed, all persons involved in the project will be communicated with immediately allowing for a faster response time.
- Improvement in Accounting Procedures – Since the entire company runs over a common database, there is no longer any need for duplicate files. This not only improves accuracy but speeds up the accounting process. Financial reports provide a complete and comprehensive projection in real time and can be customized to the needs of the person. Imagine how much time and money you would save simply by not having to complete manual journal entries and by being able to close month end in hours vs. weeks.
- Improvement in Management Information Systems(MIS) Functions – An ERP system implemented as a software package, a MIS is no longer required to collate information from different sources and can offer an instantaneous view into the company’s bottom line.
To close, there is no doubt that researching and implementing an ERP solution is a major endeavor for a company. The costs involved can be substantial and not everyone understands the benefits of an ERP. I hope this sheds some light upon the subject and gives you some basic facts and helps justify the cost of an ERP. A well defined needs analysis and project plan that identifies a growth plan, can help those who still remain skeptical.